Let’s begin at the beginning. Low taxes, light regulation, abundant energy, and a strong dollar, are the keys to economic prosperity. And prosperity is as American as apple pie. And though nothing is ever perfect, at the moment I would argue, the American economy is in a prosperous position, roughly a year after Mr. Trump and the Republicans passed their One, Big, Beautiful Bill.
The Atlanta Fed just raised its GDPNow estimate for the third quarter that ends September 30, to 5.1 percent. Real growth. Core GDP last quarter, by which I mean real domestic private sales, increased by over 4 percent.
As the Fed chairman, Kevin Warsh, pointed out in the Open Market Committee statement, the rate rise passed unanimously by a 12-0 vote, domestic spending is resilient — indeed today’s retail sales up 6 percent year-on-year, they also pointed out productivity growth is strong, and capital investment is robust. Unemployment is low.
By the way, nonfinancial productivity — output per person — is rising over 3 percent annually for the past two years. And that is counterinflationary. Meanwhile, capital investment with 100 percent immediate expensing for machinery, equipment, some buildings, a big chunk of the data center — this is the seedcorn of the future economy rebuilding our infrastructure on the supplyside, and it can’t possibly be inflationary.
Rapid productivity is likewise counterinflationary. More people working, the same. The Census Bureau just showed real median household income reached an all-time high, Hispanic and black poverty hit an all-time low. Incomes for the bottom 25 percent reached their highest level ever.
So let me repeat an old supply-side saw, growth is not inflationary. Especially this kind of business-led growth. Manufacturing profits are soaring. Of course profits are the mothers milk of stocks and the lifeblood of the economy. And that can’t possibly be inflationary.
Now it is true that Mr. Warsh has inherited the 21 percent cumulative inflation rate from President Biden and the former Fed chairman, Jay Powell. That, and a temporary oil shock for Mr. Trump’s war against Iran to prevent them from ever getting nuclear weapons. A noble mission. So as Mr. Warsh said today, the inflation rate is still too high. And he is concerned that the underlying trend is not improving to his satisfaction.
He said: “The plain fact is that inflation is too high and has been for too long. This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.” He added that, “based on the most recent” consumer price index and producer price index data, “the 12 month change in total” Personal Consumption Expenditures index “prices likely was around 3.6 percent in August.” Mr. Warsh added that core PCE and CPI are “running at about 3.2 percent and 2.4 percent, respectively. Too many categories are still posting increases above 3 percent on both a six and 12 month basis.”
So the Fed raised its Fed funds target range by a quarter of a percentage point, to the range of 3-3/4 percent to 4 percent. To some extent, we are seeing real interest rates normalizing to accommodate stronger economic growth.
If Mr. Warsh is going to liquidate some excess balance sheet reserves, in order to strengthen the value of the dollar, that’s ok. Let’s not throw the baby out with the bathwater. Regime change at the Warsh Fed should specify that growth does not cause inflation.
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